Answer

Risk is the variability of expected future return. Risk is the chances of financial loss. Assets having greater chances of loss as viewed as more risky than those with less chances of loss.

More formally, the term risk is used interchangeably with uncertainty to refer to the variability of returns associated with a given asset.

A risk measure should enable us to rank alternative risky investment. Risk measurement procedure are usually based on a particular method of organizing financial problems through probability distribution. A probability distribution is a way to describe the possible future values for a quantity.

There are two characteristics of this probability distribution tthat are useful in deciding whether the stock is worth owning - the expected value and the standard deviation

Expected value: the expected value or mean of a probability distribution measures the average value that the variable we have. We calculate the expected value by multiplying the probability of getting each price times that price and adding up the results for all possible prices. The general equation for the expected value is

Expected value=p1x1+p2x2+....................+pnxn

Where p1 is te probability of obtaining amount x1,....... etc

Standard deviation: The standard deviation of a probability distribution measures the dispersion or variability around the expected value. The standard deviation is a measure to the reliability of the expected value and therefor a measure of the risk or uncertainty of the stock price.

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Using the standard deviation as a measure of risk implies that big differences from the expected value much more risk than small differences.